This is the third installment in a multi-part series that looks at various options used by income investors to boost their yield while waiting for dividend growth to lift their portfolio’s overall yield-on-cost. Last week we looked at REITs. This week we are looking at Preferred Stock.
Preferred stock is a special equity security that has properties of both equity and debt. Terms of the preferred stock are stated in a “Certificate of Designation” and all are unique to each security. However, there are some generalities. In the order of payments, preferred stock normally has preference to common stock, but are subordinate to bonds. Preferred stock usually has no voting rights, but some have a convertibility feature into common stock. Like bonds, preferred stocks are rated by the major rating agencies such as Moody’s and S&P. The rating for preferred stock is generally lower since preferred dividends do not carry the same guarantees as interest payments from bonds, thus offer yields that are higher than bond market yields and common stock yields.
Given the unique nature of each individual preferred stock and the time necessary to research them, many have opted to place their preferred investments in funds. Consider the following preferred stock funds:
iShares S&P U.S. Preferred Stock Index (NYSEARCA:PFF) – Yield: 7.79%
The iShares S&P U.S. Preferred Stock Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P U.S. Preferred Stock Index.
Total Assets: $3.3 billion
Expense Ratio: 0.48%
Holdings: 88% Financials, 5% Consumer Discretionary, Consumer Staples 2%, 5% Other
PowerShares Financial Preferred Profile (NYSEARCA:PGF) – Yield: 8.59%
Tracks the performance of U.S. listed preferred stocks of preferred stocks issued in the U.S. market by financial institutions and currently includes approximately 30 securities selected by Wachovia, pursuant to a proprietary selection methodology.
Total Assets: $1.5 billion
Expense Ratio: 0.60%
Holdings: 100% Financials
PowerShares Preferred Portfolio Profile (NYSEARCA:PGX) – Yield: 7.91%
The Index is designed to replicate the total return of a diversified group of investment-grade preferred securities.
Total Assets: $885.5 million
Expense Ratio: 0.50%
Holdings: 83% Financials, 17% Utilities
Two additional ones to watch are SPDR Barclays Capital Convertible Bond (NYSEARCA:CWB) and SPDR Wells Fargo Preferred Stock ETF Profile (NYSEARCA:PSK). They were started in 2009, so there is very little historical data to look at. In addition, there is also Nuveen Quality Preferred Income (JTP), which is an exchange traded note (ETN) administered by JP Morgan. ETNs are linked to the performance of a market benchmark. ETNs are not equities or funds and they carry additional risk compared to an ETF. If the underwriting bank bankrupts, the value of the ETN will be eroded.
I currently do not hold any preferred stock (individually or in funds), but I am giving consideration to the funds listed above.
Full Disclosure: No position in the aforementioned securities. See a list of all my income holdings here.